Pay attention if you are a buyer who is thinking about getting a loan.  Really. Pay attention!

I want to bring to your attention the fact that Fannie Mae is part of the system of lenders who will impact how you and your bank are able to provide a loan so that you can buy a home.  And just recently Fannie Mae instituted a series of regulations concerning your credit score during the loan process.  Here’s the information you need to know if you are going to buy a home, and are getting a Fannie Mae loan.

Pay attention to your credit even after the loan is approved!

The mortgage phrase “cleared to close” just lost most of its meaning. Lenders now have incentive to revoke a mortgage approval all the way up until the time of funding.  This is Fannie Mae’s “Loan Quality Initiative.”

It’s being called the Loan Quality Initiative. In an attempt to minimize “bad loans”, Fannie Mae is asking lenders to take more responsibility for their files, then putting them on the hook if things go bad.  The Loan Quality Initiative is Fannie Mae’s response to the foreclosure surge since 2007. The program’s shifts the onus of mortgage guideline compliance away from the the government-backed group and to the individual banks responsible for making loans.  The programs’ scope is broad, taking 9 pages in summary.

For the most part, mortgage applicants won’t be bothered with the changes. It’s just extra work for the bank. Things like Social Security Number validation checks and borrower occupancy standards.  There is, however, one major consumer hurdle.  Beware The 11th-Hour Credit Score Re-pull.

In the new LQI environment, Fannie Mae wants lenders to verify that an applicant’s credit profile did not change while the loan was in underwriting. If the profile did change and the lender happens to “miss” it, Fannie Mae might then refuse to buy the loan, burdening the bank with a loan (and possibly a loss).

Because of this added risk, it behooves banks to take each mortgage applicant’s credit report in hand, and do a complete re-pull just prior to closing.

To make sure the loan is salable to Fannie Mae, banks will look for evidence of any of the following events occurring while the loan was being underwritten:

* Did the applicant apply for new credit cards?
* Did the applicant run up existing cards?
* Did the applicant finance an automobile, or other major purchase?

If the more recent credit report reveals inconsistencies versus the original credit report, the mortgage is subject to a complete re-underwrite and a possible turn-down.

The 3 Things An Underwriter Will Scrutinize

When banks re-pull credit just prior to closing, there are 3 things for which an underwriter is looking.

What the bank will do: Recalculate debt-to-income ratios using your “new” minimum payment due figures. If the DTI exceeds Fannie Mae’s maximum threshold, the loan will be denied.

What you should do about it: Don’t run up credit cards prior to closing — even for layaway items. Consider paying more than the minimum due, just in case.

What the bank will do: Use your new credit score to assess loan-level pricing adjustments or outright denials for when scores fall below Fannie Mae’s minimum credit score requirement.

What you should do about it: Follow the basic rules of keeping your credit score high — pay your bills, don’t let things go into collection, and don’t look for new credit unless necessary.   MyFICO.com has a terrific series on credit scoring you can review.

What the bank will do: Look at the Credit Inquiry section of your credit report to look for “non-disclosed liabilities”. If items are found, the bank will ask for supporting documentation on the inquiry, and will use the information to re-underwrite your mortgage.

What you should do about it: Don’t go looking for new credit until after your loan is funded. Period.

And remember — this is all happening after your loan has reached “final approval” status.  Loan Approvals Are Tougher, But Not Impossible

The reason Fannie Mae has started its Loan Quality Initiative is to improve its loan pool’s performance. Better loan quality should help keep conforming mortgage rates down while reducing the taxpayer’s burden for foreclosures.

Unfortunately, it’s also going to lead to more mortgage denials and a lot of busted purchase closings.  Therefore, be extra careful with your credit between the date of application and the date of closing. If you must buy something “big”, consider paying cash. Anything that goes on a card can be used against you as grounds for revoking your approval…..even if your loan is cleared-to-close.

What You Must Do If You are Getting a Loan to Buy A Home

If you are in the process of buying a home, or about to begin that process, and you want the services of a great professional lender, then you should Contact My Lender Joyce Nathan of Home Services Lending.

Equity Sharing Real Estate

Equity Share 201

Okay, so we know that Equity Sharing is a proven and very effective way of both buying and selling real estate. Instead of just having a bank and a buyer and/or seller involved in the transaction, we will introduce an “investor” into the mix. In doing so the responsibilities are “shared” thus opening the door to possibilities that didn’t exist before. But who are the people, and in what circumstances, that will benefit most from Equity Sharing? Here are some of the groups, and the reasoning behind utilizing Equity Sharing for each of them. 

First time home buyer with no downpayment. Let’s face it, the median price of a home in San Diego is $500,000. That means that if a first time home buyer wants to buy with a fixed rate in the traditional manner, they would have to have 20% downpayment, or $100,000. Practically no first time buyer has that kind of cash for a downpayment. And that leads to attempting to purchase the home with zero down. Once that path is chosen, then the zero downpayment option leads to loan packages with adjustable rates, teaser rates, prepayment penalties, and let’s not forget, another $100,000 of actual loan to pay for each and every month. This is a recipe for enormous risk, and it seems to me that the enormous increase in the value of homes during the past 5 years has only exacerbated this.

Divorced and forced to sell your home. Often in a divorce the husband and wife are forced to sell the home so that the equity in the home can be split. Let’s say, for example, that a couples’ home is worth $500,000, and that they bought the home for $200,000 about 10 years ago. The husband is leaving, and he wants his share (50%) of the value of the equity in the home ($300,000). Where then, does the wife get the 50% or $150,000 to pay to him, and is there any way to do it so that the wife and perhaps the children don’t have to be displaced from the home, their friends and their school? With Equity Sharing the answer is “yes.” An outside investor is found who is willing to help refinance the home, pay the husband his $150,000, and become a partner with the occupier (wife and children in this example). Generally the wife will continue payments, and after a prescribed period of time of lets say 5-7 years, the investor and the occupier have a written agreement that allows the occupier to buy the home.

Co-ownership. Sometimes it just makes sense to “go in with a friend.” This can be a very attractive situation for buyers who have “almost enough money”, but not quite enough. Rather than enter into an agreement haphazardly, Equity Sharing creates an occupancy agreement, crafted by attorneys, that outlines ALL the legal and financial aspects of a purchase so that both parties can occupy and enjoy the benefits of home ownership. Additionally, there are times when even well heeled buyers may wish to participate in purchasing vacation property with others. Here again Equity Sharing is THE way to go.

Investors. What Equity Sharing provides is a proven, risk reduced method of investing in the highly tax advantaged real estate market. When you participate in an Equity Sharing agreement with an occupier as above your investment buys you a willing and commited partner, reduced cash flow constraints, and most of the tax benefits that accrue to investment property ownership. And the Equity Sharing agreement gives you the best opportunity to insure that in all market conditions your investment will produce an ROI that is planned out from the very beginning.

Sellers. Do you want to sell and move now, and realize that with all the homes for sale now, many of which are troubled with financial difficulties, that your home may not even be seen? Do you have equity in your home that you want to use either for the purchase of another home, retirement or other purposes? If so, then with Equity Sharing you can potentially sell right now for the price you want, access much of the equity you would from a standard sale, and also maintain an interest in your current property that fully protects you, is taxed advantaged, and from which you will derive further income from later.

These are but a few of the scenarios in which Equity Sharing benefits buyers and sellers. But in our next Equity Sharing 301 session, I’ll explain why this methodology not only benefits, it also outshines and outperforms the way we have come to believe is the only way to buy and sell.

Equity Share Real Estate

Equity Sharing 101

What is Equity Sharing?Simply put, it is the process of EXPANDING on what we have been lulled into accepting as the only way to finance property. Rather than purchasing a home with two involved parties, i.e. the bank and yourself, a 3rd party becomes involved. In the process of doing so, the burdens of qualifying, coming up with a downpayment and making monthly mortgage, tax and insurance payments are RADICALLY REDUCED.

What this means is that more folks can buy, those who buy won’t have to hock all their belongings and income just to pay the mortgage, and investors who likewise have “gone it alone” will now have a much lower risk real estate investment profile.

Yes, Virginia, there is a downside, and that downside is that the investor perhaps won’t make 20% ROI, but rather 10%, and the occupier of the home won’t necessarily see a profit of $200,000 in 5 years, but perhaps only $100,000. You see, SHARING makes sense when parties want to cooperate to bring common sense to purchasing and selling real estate.

Equity Sharing is, and rightfully should be, a mainstay in the playing field of any potential seller or buyer of real estate. In Equity Sharing 201 we’ll talk about who can benefit from this approach.

What will mortgage rates do in 2010?

San Diego Real Estate News -

Well, Groundhog day passed us by, but clearly there are other prognosticators out there who once again want to take a shot at figuring out if the real estate climate in 2010 will be hot or cold.

As I continue to indicate, real estate is local, and so estimating prices from region to region are problematic.  Mortgage rates, however, generally follow a distinctive pattern.   Read the article below by the National Association of Realtors, and make your own decisions.

April 12, 2010

By Lawrence Yun, Chief Economist

* NAR’s monthly official forecast as of April 5th
* GDP 2010 Q1: +2.5%
* GDP 2010 Q2: +1.8%
* GDP 2010 Q3: +2.3%
* Unemployment rate by the year-end 2010: 9.9%
* Average 30-year fixed mortgage rate by the year-end 2010: 5.7%

What does today’s data mean for REALTORS® and consumers?

* The U.S. government’s borrowing rates shot up the past two weeks. That means borrowing rates for nearly everything will also rise.
* The only borrowing rates that might fall are for commercial real estate and jumbo residential mortgages.

10-year Treasury Yield and Mortgage Rates

* The 10-year Treasury yield has risen to about 3.9 percent in recent days. It had averaged 3.3 percent in 2009, and was at around 3.7 percent in the first quarter of this year.
* The reason for the rise in 10-year Treasury could be from investors’ belief in economic recovery and a shift away from risk-free assets (as in Treasury). Another reason is due to a very high budget deficit. The government can only finance such large loans by offering higher rates to investors.
* The 30-year mortgage rate is priced off the 10-year Treasury. Typically the spread is about 150 basis points (or 1.5 percentage points); this means that if the Treasury is 3.9 percent, then the average mortgage rate will be higher by 1.5 percentage points to 5.4 percent.
* By year’s end, the Treasury yield is expected to rise to 4.2 percent according to the Blue Chip Consensus Forecast. That would mean that the average mortgage rate on FHA and conventional loans will be 5.7 percent by the end of the year, assuming normal financial market patterns.
* Because of the lingering effects of the financial market crisis, non-conventional and non-government backed mortgages of jumbo and commercial real estate had been largely frozen. But as the financial market exhibits clear signs of stabilization and as banks continue to build up their capital buffer, it is only a matter of time before lenders start lending to non-government backed sectors. So the underwriting standards for jumbo and commercial real estate mortgages will become less stringent over time.

“Copyright National Association of REALTORS®, Reprinted with permission.”